Rick Holmes: Shrinking the income gap

Monday

Mar 29, 2010 at 12:01 AMMar 29, 2010 at 11:57 PM

It's hard to deny that the gap between the wealthiest Americans and everyone else is widening, and that inequality is greater here than in most other developed countries. It's also no coincidence that the gap started widening in 1980, the year Ronald Reagan was elected. When Barack Obama signed health care reform into law this week, he broke that 30-year trend. The gap between the rich and the rest of us shrunk, at least a little bit.

Rick Holmes

There are lots of ways to look at economic inequality, but consider just three:

- Between 1979 and 2005, the median annual income for Americans, adjusted for inflation, grew by 12 percent. The income for the top .01 percent of earners rose by 384 percent.

- CEOs of major U.S. corporations earned 40 times the pay of the typical worker in 1980. In 2007, they earned 350 times as much.

- In Japan, the wealthiest 20 percent are three and a half times richer than the poorest 20 percent. In Germany, the top fifth is five times richer than the bottom fifth. In the U.S., the wealthiest 20 percent are eight and a half times richer than the poorest 20 percent.

It's hard to deny that the gap between the wealthiest Americans and everyone else is widening, and that inequality is greater here than in most other developed countries. It's also no coincidence that the gap started widening in 1980, the year Ronald Reagan was elected. Government policies aren't the only factor behind the rich getting richer while the middle class stagnates, but they make a difference.

When Barack Obama signed health care reform into law this week, he broke that 30-year trend. The gap between the rich and the rest of us shrunk, at least a little bit.

Americans don't talk much about income inequality, partly because if you dare raise the issue, people on the right will start yelling "class warfare" and calling you a socialist. "Redistribution of wealth" is something politicians have been warned to avoid advocating at all costs.

But America has been redistributing its wealth upwards for decades. When did we decide that was a good idea?

Americans like to believe that in this country, equality of opportunity is what counts, not equality of outcomes. Because people have the theoretical opportunity to succeed, if they fail, it's nobody's fault but their own.

There is evidence to the contrary. Most Americans end their lives in the same income quintile where they started. In most European countries, people are more likely to see their children move to a higher income class than in the U.S.

Income inequality makes a difference in ways economists and policy wonks haven't explored. In their recent book, "The Spirit Level," Richard Wilkinson and Kate Pickett approach the question from their field of epidemiology, using statistical techniques designed to differentiate between the symptoms and the disease.

Wilkinson and Pickett compiled standard measures of inequality, well-being, health and a list of social pathologies for countries around the world, plotting them on charts. They confirmed the obvious, that wealthy people in any society are healthier and happier than their poorer neighbors. But they also found something more profound: that as the level of inequality of wealth within any society increases, its overall health and happiness declines.

They compared states within the U.S. as well as countries, and found that, nearly without exception, where there is less income inequality, people live longer and express more satisfaction with their lives. Where there is more inequality, there is more teen pregnancy, more abortions, more mental illness, more people in prison, even more obesity.

Is this the America we want? A place where the rich get richer, the middle class barely treads water and the poor slide into destitution? A country where with each new billionaire, everyone else gets a little worse off?

That's where we've been heading. In a recent ABC News/Washington Post poll, four out of every 10 respondents who describe themselves as middle class say they are struggling and have doubts about how much longer they'll be able to continue as part of that group. More than 92 percent of them say they have lost all hope of moving up to the next rung on the economic ladder.

The last decade has been tougher on the middle class than any in 50 years. Median household income fell over the decade. So did household net worth, while household debt rose 117 percent. The decade ended with zero net job creation. Every previous decade going back to the 1940s saw job growth of at least 20 percent.

But it was a good time for the very rich. A Bloomberg analysis found that, largely thanks to the Bush tax cuts, the 400 wealthiest Americans saw their taxes fall by a third while their average income doubled to $263 million a year.

It is in this context that the new health care reform law is as big a deal as Joe Biden colorfully pronounced it to be. As economics columnist David Leonhardt of The New York Times wrote the day after it was signed, the bill is "the federal government's biggest attack on economic inequality since inequality began rising more than three decades ago."

The inequities in the current health care system aren't perfectly aligned with income, of course. All older Americans qualify for Medicare, regardless of wealth, and Medicaid serves the nation's poorest families. You can be wealthy and still be denied insurance because of a pre-existing condition. But still, access to quality health care isn't much of a problem for the wealthiest families.

It's middle-class families, especially small-business owners, that are hit hardest by skyrocketing insurance premiums. They are the ones who have to worry that if they lose their jobs, their children might not be able to see the doctor. They are the ones who buy cut-rate policies with benefit caps, then wind up in bankruptcy, their homes foreclosed, because a serious illness isn't covered.

The new law's benefits, Leonhardt notes, will go mainly to households earning up to $88,200 for a family of four. For small businesses, insurance costs are likely to fall as they gain access to policies offered on competitive exchanges.

Meanwhile, the tax increases in the new bill will fall on companies, like pharmaceutical and medical equipment firms, that will benefit from having more people covered. Individual tax hikes will hit only those earning more than $200,000 a year, or couples earning more than $250,000. The Tax Policy Center estimates the annual tax bill for a family earning $1 million a year will rise by $46,000 in 2013.

Call that redistribution of wealth if you like, but the same can be said about the 2003 reduction in the tax on capital gains. It is just redistributing it in a different direction.

This tug-of-war will continue, even if the health care debate subsides. Some of the Bush tax cuts expire at the end of the year. Obama has promised to tackle the deficit and entitlement spending, forcing decisions on whose benefits get reduced and whose taxes get raised.

I hate to say it, but if inequality of wealth becomes the center of that debate, it could make the health care fight look tame.

Rick Holmes, opinion editor of the MetroWest Daily News, blogs at Holmes & Co. (http://blogs.townonline.com/holmesandco). He can be reached at rholmes@cnc.com.

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